For years, Wall Street investors kept their faith in Facebook Inc’s powerful advertising revenue generation machine. Investors gave Mark Zuckerberg, its 37-year-old chief executive officer the benefit of doubt when he bet the company’s future on the Metaverse [a virtual world online from which the social media company’s new name Meta is drawn], and they largely forgave callous business practices revealed by former employee Frances Haugen, a whistleblower. What mattered on Wall Street was the constant user growth that kept the Facebook ad machine printing money—a machine that accounts for a remarkable 98% of total revenue.
It is why, for years, ‘daily active users’ was the North Star to Zuckerberg and his executives as they guided the business ahead. Now, for the first time, that number has declined. Still classified as a “buy" by most analysts surveyed by Bloomberg, Facebook was downgraded by four banks, including JP Morgan Chase.
Facebook said its daily users fell to 1.929 billion in the fourth quarter of 2021 from 1.93 billion. You can imagine that ‘2 billion daily users’ was firmly in Zuckerberg’s mind as the next big target, but it is hard to see him reaching that now. With his long-term inability to build attractive new services in the face of growing competition, a new reality is sinking in: Facebook looks like a business in decline.
In its earnings call on Wednesday night, Meta pointed to all the headwinds it faces, including a $10 billion hit to its ad business this year from Apple’s privacy changes for its mobile users [that make it significantly harder for digital advertisers to track their online activity].
And it announced that its Reality Labs segment, where its plans for the Metaverse are brewing, lost $10.2 billion in 2021, a large sum even by its standards.
But Meta’s biggest weakness has been plain to see. It has tried for years to build a consumer internet service with the same allure as Facebook or Instagram, and each one—from Facebook Watch to its TikTok rival Instagram Reels—has fizzled out or struggled to make money.
The company’s cryptocurrency project Diem recently folded, despite being announced with great fanfare more than two years ago [when such a would-be currency was named Libra]. That business in particular could have pulled Meta back towards its arguably healthier, early days, when it derived roughly 15% of revenue from payments made via games like Zynga’s Farmville.
Over the years, that slice of revenue dwindled to almost nothing, as Facebook’s addiction to the advertising business grew. That has left Facebook—the least diversified of America’s Big Tech firms—quite vulnerable to any drop in users and their all-important engagement metrics with advertisers.
This latest drop, in the last quarter, was written on the wall for some time. Staff at Facebook had grown concerned in recent years about an exodus of young users, largely invisible to people outside the company, which formed the basis of Facebook whistleblower Haugen’s complaint to the US Securities and Exchange Commission, the country’s market regulator, last year.
Zuckerberg can no longer buy his way into a new business in the same way his $1 billion purchase of Instagram greased the wheels for a successful pivot to mobile back in 2012. Today, Meta can afford an already-successful Metaverse company like Roblox Corp, but regulators almost certainly would not allow it. They have promised more intense scrutiny of Big Tech deals, and already sought to reverse a $315 million deal that Facebook made last year with Giphy.
What happens next? Zuckerberg could appease investors with a stock buyback. And as his executives settle into carrying on with business, as they always have in the face of previous setbacks and scandals, Zuckerberg may want to be seen ‘doing something’ to manage Facebook’s growth issues. A time-honoured tactic is shuffling deck chairs around. He may see replacing Sheryl Sandberg, the company’s chief operating officer and Zuckerberg’s right-hand-woman for 14 years, as the next best alternative to replacing to himself.
Zuckerberg cannot be moved. He holds a majority of Meta’s voting shares and oversees a largely pliant board; he expects to still be Meta’s CEO five years from now. That means investors shouldn’t expect a turnaround like Microsoft’s, which was sparked by the replacement of Steve Ballmer by Satya Nadella in 2014.
For now, they must follow Zuckerberg into the Metaverse in the hope that daily active users will pick up along the way, or at least stop declining. That seems a tall order, though.
Parmy Olson is a Bloomberg Opinion columnist covering technology
